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5 Challenges for Family-Owned Businesses

SCORE found that of the 28.8 million small businesses in the U.S., 19% are family-owned businesses (any business in which two or more family members operate the company and the majority control lies within the family). These businesses employ 60% of the U.S. workforce and generate 64% of America’s gross domestic product (GDP). Yet these businesses face unique challenges. Here are five to consider, and what to do about them:

Setting compensation and benefits

Keeping things in the family can be a good thing, but paying the owner’s child for doing little work, no work, or bad work can create poor morale among staff members who aren’t relatives. If the business employs both relatives and non-relatives, it is important that salary and benefits be set according to the position and not according to the relationship.

Suggestion: Analyze the work that each person is doing and fix compensation accordingly, without regard to family relations. Make it clear to all that there is a level playing field for rewards for good work.

Company culture

The values of the owner’s family often become the values of the business. One research report suggests that “clan culture” is prevalent in family businesses where loyalty and traditions are highly valued. This type of culture can make it difficult for outsiders to remain and thrive.

Suggestions: Communicate the company’s values to all employees (related and non-related). Review these values to stay relevant in the marketplace so that non-relatives don’t feel excluded from what’s going on.

Separate business from pleasure

Small businesses are often like family, with co-workers caring about each other. But when that family is actually family because of relationships by blood or marriage, special problems can arise. It can be challenging to make business decisions and operate without bringing personal feelings into the mix.

Suggestion: Because the family continues to get together at the dinner table and on holidays and events, it is essential to keep business problems in the workplace. Make it clear from the start that family members will be held to the same standards as non-relatives (e.g., being timely, working efficiently) and will suffer the same consequences for bad performance (e.g., reprimands, termination).

Generational problems

When there are different generations within the family participating in the business, this can be a wonderful thing. Having younger generations in the business brings in new ideas. For example, the idea of implementing the latest technologies may be spurred by younger family members.

But there can be problems, too. A parent who starts a business may view it as his or her baby and may be resistant to having their actual children make changes in how things are done. Younger family members may feel frustrated in being held back from moving forward.

Suggestion: Each generation has something to offer to the other. Practice “active listening” where you not only hear the words but also listen to the message. Mindtools* lists five techniques for learning to be an active listener.

Succession planning

SCORE also reported that only 30% of family-owned businesses survive from the first to the second generation, and only 12% from the second to the third generation. Yet 47% of owners expecting to retire in the next five years do not have a successor.

Suggestions: As the current owner of the business, decide what you want to do with it when you retire or what happens when you die. You aren’t legally obligated to pass it on to your children. And they may or may not want it; they may have other interests that they prefer to pursue.

If the business is to remain in the family, be sure that the younger generation is prepared to take over. Involve them now in the management of your operations and inform them about financial matters so they can be ready for their future responsibilities.

Your business is a valuable asset, so also address death tax matters. Fortunately, the federal estate tax exemption is now substantial ($11.18 million for someone dying in 2018, and essentially double that amount if married). However, a number of states have death taxes, and some of these do not align with the federal exemption amount. For example, in Massachusetts and Oregon, the estate tax exemption amount for 2018 is only $1 million. This means you need to be prepared for the payment of state death taxes in a way that won’t cripple the business. Work with an estate planning attorney who can advise on measures to minimize estate tax problems.

Conclusion

Princess Diana said “Family is the most important thing in the world.” When you mix family and business, you have challenges you need to address.”